LDK Misses Critical Bond Payment, Could Lead Solar Down the Drain

Written by: Robert Weinstein04/18/13 - 12:04 PM EDT

Tickers in this article:
FSLR LDK STP TSL UNG

NEW YORK (TheStreet) -- The situation with solar cell manufacturers continues to deteriorate. Since I wrote my article "Solar's Short Squeeze Days Are Numbered" warning investors to stay away from the solar space, LDK Solar announced it would miss a debt payment.

LDK failed to make a full payment of $7.24 million on senior convertible notes with a yield of 4.75%. Convertible means that the notes may be converted into stock. Keep in mind that converting dilutes the stock, but also shareholders are subordinate to bondholders during liquidations. I wouldn't count on creditors converting into common shares anytime soon.

The China-based LDK is short cash, based on a company statement. In LDK's previously reported quarterly balance sheet statement, the company reported $453 million in cash and equivalents, down from over $800 million in the previous quarter. On Thursday, LDK reported its cash holding fell 75% and now stands at $98.3 million

In LDK's last quarter of 2012, it lost $517 million after losing $137 million in the previous quarter. In order for LDK to survive, it will need to restructure its debt with creditors. Renegotiating with creditors won't be easy.

LDK's sales are falling, margins are squeezing, The United States Natural Gas ETF is near historic lows. Meanwhile, LDK competitor First Solar recently announced the purchase of TetraSun and a breakthrough in cost-per-watt production.

First Solar expects to produce solar panels in 2017 that have a cost per watt of 40 cents; this represents a significant drop from 65 cents during 2013. LDK and other solar makers will need to forge ahead with lower-cost panels or become stranded in perpetual darkness.

Right now, LDK shareholders don't need to worry about 40 cents per watt production in 2017. Unless LDK can improve margins, profit and win over creditors, there will not be a 2017 for LDK.

In my article "Lower Energy Prices Throw a Cloud Over Solar" I lay out the reasons why the entire solar space is full of peril. First Solar's shares leapt higher during an investors' conference (dog and pony show), and many of the solar names coat tailed First Solar's rise higher; at least initially.